Inflation drops in China; look to see if the rally resumes after coming data

04/09/2013 5:48 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Remember a month ago when unexpectedly strong inflation numbers for February raised fears that the People’s Bank of China would start to tighten to fight inflation? Those fears took a substantial bite out of Chinese stocks, calling a halt to the rally that had begun in December.

Well, never mind.

Inflation in China rose at only a 2.1% annual rate in March, well below the 2.5% rate expected by economists surveyed by Bloomberg and even further below the 3.2% annual rate reported for February. Turns out that Lunar New Year holiday spending, which always temporarily raises food costs, was at work again this year. With the passing of February’s holiday period food costs and the inflation rate have dropped back to well below the government’s 3.5% inflation target for 2013.

Food prices climbed just 2.7% in March year over year, a big drop from the 6% rate of food inflation in February.

Producer prices, a measure of how much inflation might be in the pipeline, dropped 1.9% from a year earlier. That was the 13th straight decline in producer prices.

China’s inflation rate rose just 2.6% in 2012, which led the government to lower its target for 2013 to 3.5% from 2012’s 4%

Investors can expect a torrent of economic data from China over the next week. First up is export and import trade data tomorrow and then, on April 15, the government will publish first quarter numbers on GDP growth and investment in fixed assets along with March data on industrial production and retail sales. Those last two data sets are likely to have a big impact on financial markets since February’s figures showed the weakest start to a year since 2009.

There is one group in China that isn’t cheering today’s inflation news. The cost of pork fell 5.5% in March year over year. That has pushed pork prices down to a point where pig farmers are taking losses. In response the government has started purchasing frozen pork for the national pork stockpile.

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